Credit Crunch Coming To An Airline Near You (UAUA, CAL, AMR)

With crude oil prices now down more than 40% from their all time high of $147 a barrel, folks operating the airlines must be breathing a huge sigh of relief as the crushing burden of sky-high higher fuel costs has now been significantly reduced. But just as things have improved on the fuel cost front, the industry now faces a new set of challenges that could accelerate the consolidation process for this battered industry.

Airline Rally Hits Extreme Turbulence
The lower fuel cost inspired rally off the July lows came to abrupt halt over the last four trading sessions as the shares of the most of the major U.S. carriers went into a nose dive, loosing nearly half their value in a matter of days. UAL Corp. (Nasdaq:UAUA) slid more than 47%, Continental Airlines (NYSE:CAL) dropped 38%, AMR (NYSE:AMR), the parent of American Airlines, fell by 39%, and Delta Airlines (NYSE:DAL) gave back 33%.

Passengers Give Thumbs Down To Higher Fares
Part of the reason for the negative reaction was the release of passenger traffic numbers for September that showed a dramatic drop in traffic following a recent round of fare increases by seven of the major U.S. carriers. Expressed in terms of the standard industry metric, revenue passenger miles (RPM), Continental experienced the worst drop with a 10.9% decline in September 2008 traffic compared to the same month a year earlier. United and American also saw their numbers fall significantly, dropping 9.2% and 9.1% respectively.

This slowdown in traffic isn't just a U.S. phenomenon. Europe's third largest carrier, British Airways, also reported that sales of premium and economy tickets fell in September, with first-class and business-class traffic slumping 8.6%. The decline was seen as evidence that the global credit crisis is now starting to hit travel budgets of London and New York-based financial firms whose staff where frequent flyers on the transatlantic run served by BA. British Airways shares recently high five and half year lows in London trading.

Airlines Now facing Tough Financing Environment
Apart from affecting the lucrative business-class passenger market, the credit crunch now threatens to do more serious and lasting damage by chocking off the supply of credit to the industry. In a recent Bloomberg report, spokespeople for several leading European airline lenders and leasing entities unanimously agreed that financing would be "extremely limited" in 2009, adversely effecting the ability of some airlines to buy new aircraft. Recognizing this would be a huge blow for their own businesses, leading aircraft builders like Europe's Airbus SAS and Boeing (NYSE:BA) have expressed their willingness to increase their own lending programs on new plane orders. However, tighter credit conditions are expected to hasten the inevitable consolidation of the industry.

The Final Word
It now looks like we've entered a new evolutionary stage for the airlines which will be characterized by a survival-of-the-fittest, Darwinian-style cull. In a recent report Stifel Nicolaus airline analyst Hunter Keay postulated that we're entering a new period where air travel becomes a "mid-priced luxury good". That implies there will be a lot fewer people able to afford flying in the future than there are today. Right now, it's just too early to say with any certainty which carrier will survive and possibly thrive in this new, smaller, air travel market.